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China Sets Bank IPO in Motion

Recent $15 Billion Injection
Into Lender ICBC Is Viewed
As First Part of Big Package

By

Andrew BrowneStaff Reporter of THE WALL STREET JOURNAL

Updated April 25, 2005 12:01 a.m. ET

HONG KONG -- With a US$15 billion bailout, China has launched its biggest bank toward an initial public offering, undaunted by scandals that have complicated the listing plans of two other giant state lenders.

Banking analysts say the bailout for the
Industrial & Commercial Bank of China,
which has some 20,000 branch offices and 400,000 employees, is just the first installment of what is likely to be a far bigger rescue package. The bank hopes to list as early as next year, but much will depend on the success of IPOs by the Bank of China and China Construction Bank, both of which are determined to issue shares domestically and in Hong Kong this year. Combined, those two listings are expected to raise more than $10 billion.

But a string of scandals, including last months's resignation of China Construction Bank's chairman amid a corruption probe, has raised doubts about the success of a massive overhaul effort aimed at turning around China's Big Four commercial lenders, which account for some 60% of all banking assets. The fourth lender is the Agricultural Bank of China.

A notice posted yesterday on the Web site of China's top banking regulator urged attention to new problems that may appear during changes at three of the country's largest state-run commercial banks. It quoted Liu Mingkang, chairman of the China Banking Regulatory Commission, as saying at a Friday meeting that close attention should be paid to the Bank of China, China Construction Bank and
Bank of Communications,
which is the fifth-biggest lender in China and is 19.9% owned by
HSBC Holdings
PLC.

Mr. Liu also urged further supervision of changes at ICBC, China's biggest commercial bank in terms of assets. The bank's $15 billion bailout was announced the night before the meeting.

The ambitious overhaul of China's Big Four state banks began in earnest in 1998 with a $32 billion capital injection from the Ministry of Finance. The following year, the government lifted $170 billion of nonperforming loans off the books of those banks and handed the loans to asset-management companies, which are slowly selling them off at auction.

In December 2003, Beijing dipped into its vast foreign-exchange reserves and gave Bank of China and China Construction $22.5 billion each as fresh capital to enable them to offload additional bad debt. Even all of that wasn't enough. In June, Bank of China and China Construction sold a combined $34 billion of nonperforming loans to an asset-management firm at 50% of face value. Bank profits are being used for further write-offs.

For many decades under China's socialist economy, the Big Four propped up unprofitable state enterprises with loans -- support that in other economies might have been counted as a budgetary expense. For that reason, bad loans prior to the big 1999 bailout are regarded as a historical legacy. ICBC, the mainstay lender for Chinese state enterprises, still has a mountain of such legacy loans.

The $15 billion injection into ICBC, also using foreign-exchange reserves, is only enough to bring the bank's core capital-adequacy ratio up to 6%. In time, the bank plans to issue subordinated bonds to bring that level up to the internationally accepted 8% level.

The balance sheet clean-up is intended to get state banks in better shape to withstand foreign competition when the market is fully opened at the end of 2006. It also is essential if banks are to attract foreign investment. Both Bank of China and China Construction are wooing the world's biggest financial institutions to become "strategic partners" ahead of their planned IPOs.

Estimates of how much more money will be poured into ICBC vary wildly. Officially, the bank's bad debt at the end of 2004 stood at $84 billion, giving it a nonperforming-loan ratio of 20%. But many economists say the real figure could be several times higher. Low estimates for how much additional capital is required start at $30 billion. Fitch Ratings reckons the total is $50 billion.

HSBC banking analyst Russell Kopp says the final bill could reach $80 billion, and the first installment of $15 billion "is way too small." Still, Mr. Kopp says ICBC is arguably in no worse shape than Bank of China and China Construction when they received their bailouts from foreign-exchange reserves 16 months ago. And it could be on track for a listing, depending on how its two smaller siblings perform during their IPOs. "A lot depends on markets and price," he says.

"It's a bit like Pepsi and Coke," Mr. Kopp says, comparing the differences between the three state lenders. "Their culture, management and internal systems are more or less the same."

Victor Shih, an assistant professor at Northwestern University in the U.S. and an expert on the Chinese banking system, says it is possible the government could pump an additional $20 billion to $30 billion into ICBC using foreign-exchange reserves. The reserves reached $659 billion at the end of March, up nearly $50 billion since the start of this year.

However, Mr. Shih says that while Bank of China and China Construction were forced to work hard for their foreign-exchange bailout by meeting strict performance benchmarks, ICBC "hasn't done nearly as much" to improve while its managers have retained the traditional mindset of a state-owned enterprise. "It's an even worse precedent," he says of the bailout announced last Thursday, adding that ICBC's IPO "could languish for years."

The foreign-exchange injection made through Central Huijin Investment, an arm of the central bank, will leave Huijin owning half of ICBC's core capital, with the finance ministry owning the rest. Huijin now owns nearly all of Bank of China and China Construction, and some banking analysts say there has been a tussle over ICBC, with the finance ministry unwilling to give up ownership entirely.

—-- Jeff Meyer of Dow Jones Newswires in Shanghai contributed to this article.